Olympic Economics: Boom Or Doom?

According to a January 23 article in the Vancouver Sun, the 2010 Winter Olympics are costing Vancouver (and Canada) as much as $6 billion (depending on whom you ask). It's big money that the city expects to recoup. But is that likely to happen?

The Olympics have long been assumed to provide an economic boost to the host city. And although the economic impact can be hard to quantify, studies show that the benefits are substantial. There are unique benefits surrounding the three different phases of the Olympic games: the pre-event phase, the event phase and the post-Event phase. Overall, economic boosts to the local and regional economies are well documented. And in cities within smaller countries, there is evidence of a boost to national economic output as well.

Pre-Event PhaseThe pre-event phase of any Olympics includes the building of infrastructure, including new roads, airports or airport enhancements, rail lines, housing (such as the Olympic village), additional hotels, and any other venue or transportation facility deemed necessary for the successful operations of the Olympic games. These additional expenditures are easily calculated, including the number of additional jobs created, output generated, and costs incurred. Provided these funds flow to local architects, contractors, builders, employees, etc., the economic impact can be readily calculated. However, when calculating the costs or benefits of this phase, one must make sure to only take the net effect of the Olympic games rather than the gross expenditures during the same period. For example, many of the infrastructure projects completed in Vancouver for the 2010 games were already scheduled even before Vancouver was named as the host city. These specific projects would have to be netted out to determine the Olympic-specific expenditures. (Find out how to capitalize on this phase in Build Your Portfolio With Infrastructure Investments.)

Event PhaseThe event phase of the Olympics includes an entire year surrounding the actual games. In the period between six months before and six months after the Olympic events, there are certain activities that occur that can be directly attributable to the games themselves. But the majority of the economic benefit during this phase is the arrival of hundreds of thousands of visitors in the form of spectators, sponsors, athletes, media, etc. While we can assume that there may be certain tourists that would avoid the host city during the Olympic games, the dramatic increase in visitors typically results in a net positive effect to the local economy, and as stated in the opening paragraph, to the national economy when the host country is relatively small.

Post-Event PhaseAlthough there is general consensus that the economic benefits of hosting the Olympic games are generally positive for years after the Olympics, it is hard to quantify this number. For example, how would the improved productivity of new roads built for the Olympics be calculated for the cities' residents for future years? How would the increase in tourism following the event be calculated, and what amount can be attributed to the increased exposure the host city received? What about the economic benefits of increased housing? Or even the new athletic facilities?

Before 1976, there weren't many studies of the economic benefits of hosting the Olympic Games. After the Montreal games in 1976, in which that city realized a considerable budgetary shortfall that was paid for through a tobacco tax over 30 years. Since then, the Olympics has become more commercialized through the development of global Olympic sponsorship deals. A study by PriceWaterhouse Coopers of summer Olympic games held from 1984 to 2000 showed varying degrees of measurable economic success. All the hosting cities had a positive economic benefit from hosting the Olympics, but the range as a percent of GDP was considerable. Barcelona had an estimated economic benefit of 0.03% of regional GDP, while Sydney had an estimated economic benefit of 2.78% of regional GDP. (Atlanta, 2.41% of regional GDP, Seoul, 1.4% of national GDP, and Los Angeles, 0.47% of regional GDP). Similar comparisons for the winter Olympics are hard to come by, but it's a smaller event overall with considerably fewer sports, so it may be assumed that its impact would be smaller as well.

ConclusionCities often tout the economic benefits that hosting an Olympics will bring. But while this is generally assumed to be true, the wide range of estimates - both for the cost and the projected economic benefits - of the ongoing Vancouver Olympic Games suggests that the benefit of loss is not so easy to pin down. The current Olympics has been both warmly embraced and vociferously protested, largely on economic grounds, but the jury's still out on whether it will be a cash cow or an economic hardship for this host city.